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By Amit Kumar, Ph.D. Fellow for Homeland Security and Counterterrorism, Center for National Policy

The Revised FATF Standards and FATF Methodology: Some Highlights and Impact on Global AML/CFT Efforts AMLA’s 3 rd Full Day BSA/AML Conference Rosemont, IL October 4, 2013. By Amit Kumar, Ph.D. Fellow for Homeland Security and Counterterrorism, Center for National Policy.

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By Amit Kumar, Ph.D. Fellow for Homeland Security and Counterterrorism, Center for National Policy

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  1. The Revised FATF Standards and FATF Methodology: Some Highlights and Impact on Global AML/CFT EffortsAMLA’s 3rd Full Day BSA/AML ConferenceRosemont, ILOctober 4, 2013 By Amit Kumar, Ph.D. Fellow for Homeland Security and Counterterrorism, Center for National Policy

  2. Highlights of New FATF Standards • Combining AML and CFT Standards • Risk Based Approach to AML/CFT • Targeted Sanctions Related to proliferation of WMD • To equip jurisdictions and institutions to adopt preventive measures and systemic controls against ML and TF • Responsibilities of competent authorities and standards dealing with national cooperation and coordination

  3. Impact of Combining AML and CFT standards • Similarities between ML and TF • Terrorists using criminal methods more • Harmonize efforts of regulators and examiners • Harmonize compliance with combined AML and CFT standards on part of financial institutions • Harmonize efforts of International assessors tasked with AML/CFT compliance • ML involved in siphoning of funds from licit businesses and charities by terrorist organizations

  4. Impact of Risk Based Approach to ML/TF • Threats in jurisdictions different– geographic location, economic development, legal and regulatory apparatus, kind of methods used to raise, launder, store, move, and deploy funds • Vulnerabilities of financial institutions different-customer profile, nature of business, management, environment • Risks assessments by squaring Threats and vulnerabilities • Resource allocation to mitigate risk based on risk assessments lowering compliance costs • One size fits all compliance paradigm costly

  5. Risk Based Assessment for Financial Institutions-Categories of Risk Whom, Where, and What • Client Risk– obscuring understanding of ownership, business, nature of transactions; transactions not keeping with understanding of client’s business; client sectors prone to ML/TF • Country or Geographic Risk-Sanctions; weak regulations ; providing TF; corruption or criminal activity • Service Risk- services provided by financial institutions and intermediaries which risk being used to assist ML, like advice on setting up legal arrangements which may be used to obscure ownership or real economic purpose; misuse of introductory services

  6. Risk Based Assessment for Financial Institutions-Application of a Risk Based Approach • Customer Due Diligence/Know Your Customer • Monitoring of Client Business and Transactions for Suspicious Activity • Suspicious activity reporting to designated competent authorities • Training and Awareness on AML/CFT compliance requirements

  7. Risk Based Assessment for Financial Institutions-Internal Controls • Culture of Compliance • Senior Management Ownership and Support

  8. Impact of Targeted sanctions related to WMD proliferation • Targeted sanctions against terrorists and criminals • Terrorists and criminals conduct terrorism and money laundering activities by procuring, deploying, and using WMD and/or their delivery systems • Jurisdictions now have to comply with standards relating to targeted sanctions against nuclear proliferators • Terrorist financing activity accompanying money laundering and WMD proliferation targeted

  9. Impact of equipping jurisdictions and institutions to adopt preventive measures and systemic controls against ML and TF • Preventive measures and systemic ML/TF controls and their importance to jurisdictions and financial institutions • Customer due diligence, additional measures for PEPs, correspondent banking, Money transfer, new technologies, wire transfer; internal controls and foreign branches and subsidiaries; SAR Reporting; and DNFBPs • Encourage system wide compliance and boost financial integrity of both jurisdictions and institutions

  10. Impact of Responsibilities of competent authorities and standards dealing with national cooperation and coordination • Encourage dovetailing of financial intelligence and criminal/counterterrorism intelligence • Financial intelligence from FIUs through SARs/CTRs • Counterterrorism/AML intelligence from law enforcement • Improve prosecution and conviction of ML and TF offenses • Aid in development of TF/ML typologies • Reduce costly defensive filing of SARs

  11. Highlights of the new FATF Methodology • Technical Compliance Assessment • Effectiveness Assessment • Nature of ML/TF risks • Materiality (e.g. make up of the economy and its financial sector) • Structural elements • Other Contextual factors

  12. Technical Compliance Assessment • Technical compliance assessment addresses the legal and institutional framework of the country, and the powers and procedures of the competent authorities-in other words testing compliance with each of the FATF Standards • 5 point rating scale C (Compliant)– there are no shortcomings; LC (Largely compliant)- there are only minor shortcomings; PC (Partially Compliant)- there are moderate shortcomings; NC (Non-Compliant)- there are major shortcomings; NA (Non Applicable)- A requirement does not apply, due to the structural, legal, or institutional features of a country

  13. Effectiveness Assessment • Assesses the adequacy of the implementation of FATF recommendations, and identifies the extent to which a country achieves a defined set of outcomes that are central to robust AML/CFT system • 4 point rating scale: High Level of Effectiveness- The Immediate Outcome is achieved to a very large extent--Minor improvements needed; Substantial level of Effectiveness—The Immediate Outcome is achieved to a large extent– Moderate Improvements needed; Moderate level of effectiveness—The Immediate Outcome is achieved to a large extent—Major improvements needed; Low level of effectiveness—The Immediate Outcome is not achieved or achieved to a negligible extent– Fundamental improvements needed

  14. Elements of Risk Assessment • Nature and extent of ML/TF risks • Circumstances of a country, which affect the materiality of different recommendations • Structural elements that underpin the AML/CFT system • Other contextual factors which could influence the way AML/CFT measures are implemented and how effective they are

  15. Materiality • Relative importance of different parts of the financial sector • Size, integration, and make-up of the financial sector • Relative importance of different types of financial products or institutions • Amount of business which is domestic or cross-border • Extent to which economy is cash-based • Estimates of the size of the informal sector and/or shadow economy • Most important and relevant issues to the country should be given more weight when determining technical compliance ratings, as well as when assessing effectiveness

  16. Structural Elements • Political stability • High-level commitment to address AML/CFT issues • Stable institutions with accountability, integrity, and transparency • Rule of law • Capable, independent, and efficient judicial system • Deficiencies in structural elements may adversely impact both technical compliance and effectiveness ratings

  17. Contextual Factors • Maturity and sophistication of the country’s regulatory and supervisory regime • Level of corruption and the impact of measures to combat corruption • Level of financial inclusion • Contextual factors affect ML/TF risks and increase/decrease effectiveness of AML/CFT measures

  18. Links to Documents of Interest • The Revised FATF Standards: A Shot in the Arm for Countering the Financing of Terrorism Efforts. By Amit Kumar, Ph.D. CNP Security Center Blog. April 16, 2012. Available at http://cnponline.org/ht/display/ViewBloggerThread/i/37450/pid/35636 • ABA Publication on Cash Couriers. Available at http://www.americanbar.org/content/dam/aba/events/administrative_law/2013/06/8th_annual_homelandsecuritylawinstitute/mondaylaundering_combined.authcheckdam.pdf • International Efforts in CFT. By Amit Kumar, Ph.D. Critical Infrastructure Report., Center for Infrastructure Protection and Homeland Security. George Mason University School of Law. May 2013. pages 16-18. Available at http://tuscany.gmu.edu/centers/cip/cip.gmu.edu/wp-content/uploads/2013/06/Correction_May-2013_International.pdf

  19. Questions??

  20. Contact Information Amit Kumar, Ph.D. Fellow for Homeland Security and Counterterrorism Center for National Policy Tel: 703-899-2255 Email: akumar@cnponline.org

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